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Good recordkeeping critical in trust accounts

ImageAs someone who defends attorneys against malpractice complaints, Daniel Schumack has noticed that solo lawyers are particularly prone to errors managing their client trust accounts.

“In the District of Columbia and Mary-land, there are a disproportionate number of complaints filed against smaller law firms when it comes to the mishandling of trust money,” said Schumack, a managing partner of Schumack Ryals in Fairfax, Va.

The same is true in Wisconsin, said attorney Dean R. Dietrich, who chairs the State Bar’s Professional Ethics Committee.

He said larger firms may be able to rely on a business manager to help with record keeping, whereas with smaller outfits, the responsibility often falls on the attorney.

“So the best thing a lawyer can do to ensure proper record keeping for a lawyer trust account is to use good business sense,” said Dietrich of Ruder Ware LLSC in Wausau.

But Schumack noted that “soloists fre-quently do not have a bookkeeping background and their problems emerge out of a lack of bookkeeping knowledge or skill.”

For example, he explained, “They will deposit checks meant for a trust account that wind up in their operating account by accident, maybe using the wrong checkbook or deposit slip.”

Natalie R. Kelly, director of the law practice management program for the State Bar of Georgia, agreed that when it comes to client trust accounts, “solos have the most problems.”

“They fail to give many of their financial management procedures oversight. Sometimes they will abdicate their duty of making sure they check up on things regularly, especially in situations they find routine,” she said. “They’re not reconciling their accounts on a regular basis, or they’re letting staff do it and not paying close attention.”

Lack of oversight can open the door to major problems, including embezzlement by staffers.

Kelly said that over the past year and a half, there has been an uptick in complaints about embezzlement by law firm staff. The increase, she said, may be related to the economic downturn, as more people look for easy money in hard times.

But whether it’s due to an inadvertent mistake or staff embezzlement, an overdraft of client trust accounts is a serious problem that can land a law firm in hot water.

In Virginia, Maryland and many other states, a client trust account overdraft — even if inadvertent — triggers an automatic bank notification to the state bar counsel.

“Just because you’ve hired someone to do the trust account work doesn’t remove you from responsibility,” Schumack noted.

Sheila Blackford, Practice Management Advisor for the Oregon State Bar Professional Liability Fund, said a common mistake lawyers make is failing to wait a sufficient time period after depositing a client’s check in a trust account. The lawyer thinks the client’s check has cleared, writes a check for expenses and ends up overdrafting the account.

The most common mistake Dietrich encounters is lawyers not having separate transaction records for every client.

He also emphasized the importance of not “mingling” a lawyer’s personal funds or assets with a client’s money.

“There’s a level of diligence the lawyer needs to follow whenever handling client funds,” Dietrich said.

Lawyers need to be particularly careful with pooled trust accounts. Often, a small firm has a pooled account, opening a separate trust account only for a large settlement or home sale.

“Sometimes you have instances where a client gives a retainer fee that is placed in a pooled trust account, the check bounces, but the firm has already written a check for another client’s expenses,” Blackford noted.

Avoiding problems

Solo and small-firm lawyers can take several simple steps to prevent errors and reduce risks in the management of their client trust accounts, including:

  • Use different colored checks for client trust and operating accounts, Schumack suggested.
  • Purchase an electronic bookkeeping system, such as Intuit’s QuickBooks.“A lot of these products eliminate your need to know how to do real bookkeeping, like double entry,” Schumack noted.
  • Reconcile client trust accounts on a regular basis.Accounting packages bundled with time management and billing software — such as Timeslips by Sage Software, PCLaw by LexisNexis and Tabs3 by Software Technology — can make the task easier, Kelly noted.
  • Make sure any bank statements are delivered to you unopened, and that you have the sole password to look at trust accounts on a regular basis, Kelly suggested.
  • Allow sufficient time for client checks to clear before dispersing funds.
    Blackford suggested allowing three days for a local check; five days for a check within your state; and 10 days for an out-of-state check.
  • Make sure you see expense statements and bills before signing any expense checks, Blackford said.
  • Maintain a ledger card for each client, Blackford advised.Each card should list dates and actions for the client, such as when a retainer was deposited, and when a check was written to pay an expert witness.
  • Establish your own checks and balances, such as asking to see the reconciliation for a particular client within a particular month.

“The golden rule is to know the overall balance in your trust account, and then how it’s allocated out,” Kelly said. Lawyers with questions about client trust accounts should contact their local bar associations.

Many have practice management advisers who specialize in helping solo and small law firms.

The ABA also offers seminars and materials about client trust accounts.

Dietrich said the Wisconsin Office of Lawyer Regulation offers several programs which summarize record keeping requirements.

“Many times the sanction will be either a private reprimand or an agreement to go to a specific training on trust account rules in lieu of any type of reprimand,” he said.

And if you do make a mistake, don’t run from it, Kelly advised.

In Georgia, the bar association’s overdraft notification officer contacts an attorney whenever a trust account is overdrawn.

Typically, the investigation is short-lived if the lawyer explains and corrects the error.

“If it’s an honest mistake, at least in Georgia, you have an opportunity to show what happened,” Kelly said.

“However, many lawyers bury their heads in the sand and make it worse if they don’t respond when they’re asked why a particular item in a trust account is off,” she said.

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